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SYDNEY: The Australian and New Zealand dollars were pinned near major support levels on Thursday as markets globally awaited the latest reading on US inflation, where a surprise in either direction will likely spark much volatility.

The Aussie was stuck at $0.6533, after an attempted rally failed at $0.6571 overnight.

Support lies at the two-month low of $0.6497 hit early in the week.

The kiwi dollar was just as static at $0.6054, having faltered at $0.6095 overnight to leave it uncomfortably close to the recent trough of $0.6035.

Data on US consumer prices for July is shaping up to be a major event, as any repeat of the downside surprise seen in June could fuel a rally in bonds as markets scale back the risk of further rate hikes and bet that cuts are likely from early next year.

A modest downside surprise in Australian inflation last quarter led the Reserve Bank of Australia (RBA) to hold its rates steady for a second month, and has seen markets wager the entire tightening cycle might be over.

Futures imply almost no chance of a hike in the 4.1% cash rate in September and about a 50% probability of a move by year-end. Yet investors also assume Australian inflation will prove too persistent to allow the RBA to ease anytime soon, with only 20 basis points of cuts priced in for all of 2024.

In contrast, futures have around 130 basis points of US easing priced in for next year. Kristina Clifton, a senior economist at CBA, thinks the market is underestimating how fast rates may drop.

Australia, NZ dollar downtrend pauses, still vulnerable to China woes

“We forecast a rate cutting cycle beginning March 2024 with 100bp of rate cuts by end 2024,” she said.

“If we are correct, then over the coming months financial markets may begin to price a larger rate cutting cycle from the RBA in 2024, lower market interest rates and weighing on the AUD.”

Yields on three-year bonds have been in decline recently, touching a nine-week trough of 3.746% on Wednesday and well away from a July peak of 4.297%.

Ten-year yields have been constrained around 4.0%, leading the yield curve to steepen to +25 basis points and reverse a rare inversion seen in June.

New Zealand’s yield curve remains inverted at -6 basis points, reflecting the fact the economy is already in a technical recession.

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